Purpose of Corporate Governance & Corporate Governance Codes

Purpose of Corporate Governance & Corporate Governance Codes
July 29, 2020

Any organization lacking the Corporate Governance structure is like a train without its tracks. No matter how well geared and equipped an organization might be towards achieving its goals, it can’t be successful without the right governance structure. In other words, Corporate Governance is a system through which companies are directed and controlled by a board of directors. Good Corporate Governance is known to be a key factor when it comes to maximizing integrity and efficiency of an organization. On the contrary, poor Corporate Governance can drill a hole in a company’s image, and undermine its potential, especially when it comes to effective financial management.

Organizations, which make use of the core principles of Corporate Governance, will always find themselves outshining and attracting investors on a regular basis. A good inflow of investors will mean that organizations will be sufficiently funded and have enough financial resources to perform its daily, weekly and monthly activities.

The core principles of Corporate Governance include fairness, accountability, responsibility and transparency. Corporate Governance is a vast network; it has several considerations which need to be kept in mind while building the governance structure. For example, public corporations need shareholder approval to set up their corporate governance rules, regulations and structure.

Some benefits of Corporate Governance include, but are not limited to, the following:

1. Streamline processes
Organizations which employ robust corporate governance may be able to effectively streamline their business, and in turn, maximize their profits over a period of time.

2. Effective checking too
By creating a set of guidelines, there is a check which can be put into place for all shareholders, employees and management people, outlining everyone’s responsibilities.

3. Structured internal control
Through the implementation of a good Corporate Governance structure, there’s a high possibility of creating a lucrative, yet conducive environment for an effective internal control system.

4. Enhanced decision making
The top management is concerned with making the right strategic choices, for the betterment of the organization. With the right governance structure in place, the top management is in a better position to take the right decisions, which can help the organization meet its goals.

5. Reducing the organizational cost of capital needs
A good governance structure will mean that the company is stable and well organized. This means that more and more investors would want to be a part of the organization’s voting powers, and the top management will find it easier to find the necessary sources for securing capital.

The need for a valid Corporate Governance Code:

The past two decades have seen a lot of corporate scandals, which have changed the outlook of the business world. With these scandals taking precedence over every other business operation, the stakeholders are the most vulnerable in such circumstances. For this very reason, it is important for organizations to adhere to a uniform Code of Conduct, which is prevalent throughout the world. In order to make organizations toe the line with respect to Corporate Governance, there are a series of codes which have been listed. These codes are a set of good practices, which relate to the issues pertaining to board composition, remuneration, audit and accountability, and last but not the least, the relationship with stakeholders.

1. Leadership
The leadership code states that every company should be headed by a competent leadership board, which will be solely responsible for the long term success of the company. This would further mean that the demarcation of responsibilities should be clear throughout the organizational hierarchy, right from the top to the bottom. This also means that the division of powers should be spread throughout the company and not rest within the hands of a single individual only.

2. Effectiveness
The board of directors should possess the required skills and experience along with the knowledge of the company, to help them perform their duties and responsibilities adequately and to the hilt. With this said and done, it should also mean that there is a formal and rigorous procedure laid down for the appointment of new directors to the board.

3. Accountability
The board will be held responsible and accountable for the actions of the organizations, and the methods followed for meeting the organizational goals. Keeping this thought in mind, it’s important to note that the board will be responsible for determining the risks the organization is ready to take in order to meet the organizational goals. This would also entail the use of a sound internal control environment which will be useful in safeguarding the organizational and stakeholders interests in the short run and the long run.

4. Remuneration
Executive directors should be adequately remunerated for his/her services, as per the set market standards. There need to be clear cut guidelines around the performance related elements, making them transparent, effective and related to the duties of the executive director(s). Each director’s remuneration packages should be transparent and well designed, in order to match the market standards and the immediate competition.

5. Shareholder Relations
Last but not the least, the stakeholders are the most important party which plays an integral role in deciding the Codes of Corporate Governance. The shareholders are the investors of the company, and there should be clear cut guidelines around the dividend payouts, the role of the shareholders and their roles and responsibilities in the working of the organization.

The Final Word

Corporate Governance is an important segment within every organization, and its importance is unmatched. The very concept has been specifically aimed at helping companies maintain their operations, while remaining compliant with the prevalent legislative laws. The Core Principles or Codes vary within each country of the world; however, the crux of these codes is somewhat similar, making each of these core values as important as the other. Each organization is required to follow the Codes, in order to achieve success in their endeavors. Once the Corporate Governance structure is in place, each company can rest assured it will be able to meet the laid down targets in the right possible manner.

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